Malik started a travel luggage company selling only one style of luggage. It has just completed its first year of trading. The summary profit and loss account for the year is set out below:   £ £ Sales (20,000 units)   1,280,000 Less: Direct Costs     Direct Material 360,000   Direct Labour 320,000   Direct Expenses 80,000         Less: Fixed Expenses     Overhead cost 541,000 1,301,000 Net Loss   21,000   The following information is available: all of the direct costs are variable with production the production overhead figure does not vary with the output.   Required: (a) The break-even point in units and sales value. (b) Margin of Safety in Units. (c) The number of units needed to be sold to achieve a profit of £14,000.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Malik started a travel luggage company selling only one style of luggage. It has just completed its first year of trading. The summary profit and loss account for the year is set out below:

 

£

£

Sales (20,000 units)

 

1,280,000

Less: Direct Costs

 

 

Direct Material

360,000

 

Direct Labour

320,000

 

Direct Expenses

80,000

 

 

 

 

Less: Fixed Expenses

 

 

Overhead cost

541,000

1,301,000

Net Loss

 

21,000

 

The following information is available:

  • all of the direct costs are variable with production
  • the production overhead figure does not vary with the output.

 

Required:

(a) The break-even point in units and sales value.

(b) Margin of Safety in Units.

(c) The number of units needed to be sold to achieve a profit of £14,000.

(d) special order was received at last minute to supply 5,000 units at a price of £60. Should the company accept this special order?

Explain your answer using appropriate calculations.

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(d) special order was received at last minute to supply 5,000 units at a price of £60. Should the company accept this special order?

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Follow-up Question

The company has set a profit objective of £24,000 for year 2. The following suggestion have been made as to how this profit could be achieved.

Reduce the selling price by £3 per unit and use a less expensive material that would reduce the direct material cost by £2 per unit

 

Required

 For the above suggestion, calculate how many units need to be sold to achieve the profit objective of £24,000.

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For the above suggestion, calculate how many units need to be sold to achieve the profit objective of £24,000.

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